Question 1

David manages a Shoney's restaurant. He is considering staying open later in the evening. For David, the variable costs associated with staying open longer hours will include all of the following EXCEPT
A) ingredients used in preparing food.
B) hours worked by cooks.
C) rent on the restaurant building.
D) energy costs.
E) hours worked by the waiters and waitresses.

Accepted Answer

Rent on the restaurant building is a fixed cost, which means it does not change with the level of production or sales. The other options listed are variable costs that will increase if the restaurant stays open longer in the evening.

Question 2

Variable costs change with
A) changes in fixed costs.
B) changes in cross-price elasticity.
C) changes in target return pricing.
D) changes in the quantity being produced.
E) competitive parity.

Accepted Answer

Variable costs are costs that change in direct proportion to the level of production. Therefore, when the quantity being produced changes, variable costs will also change. The other options listed are not directly related to variable costs.

Question 3

Cross-price elasticity is the
A) percentage change in quantity of a product demanded divided by the percentage change in its price.
B) percentage change in quantity demanded of product A compared to the percentage change in price of product B.
C)change in price of product A divided by change in quantity demanded for product B.
D)change in quantity of a product demanded divided by the change in its price.
E)change in quantity of a product demanded divided by the change in its elasticity.

Accepted Answer

Cross-price elasticity measures the percentage change in quantity demanded of one good compared to the percentage change in price of another good. Therefore, option B is the correct definition of cross-price elasticity. Option A describes price elasticity of demand, option C is not a valid definition, option D is a simplified version of option A, and option E is not a valid definition.

Question 4

Labor, materials, and energy are typically __________ costs.
A) fixed
B) incidental
C) prestige
D) inelastic
E) variable

Accepted Answer

Labor, materials, and energy costs are typically variable costs, meaning they vary with the level of production or output. This is because as production increases, the amount of labor, materials, and energy required also increases.

Question 5

Sales of national brands of orange juice tend to increase when the economy is doing well, while sales of generic orange juice increase when the economy is not doing well. This is an example of how ____________ affects demand for products.
A) the substitution effect
B) the price inelasticity coefficient
C) the income effect
D) the target return effect
E) cross-price elasticity

Accepted Answer

This is an example of the income effect, where consumers' purchasing power is affected by changes in the economy. When the economy is doing well, consumers have more disposable income and tend to purchase higher-priced national brands. Conversely, when the economy is not doing well, consumers may have less disposable income and opt for lower-priced generic brands instead.

Question 6

Bill is a yacht broker in the southeastern United States. For years he has had difficulty selling large yachts locally because there were few places to dock these boats. Yachts and spaces to dock them are an example of
A) substitute products.
B) purely competitive products.
C) status quo pricing products.
D) complementary products.
E) competitive parity products.

Accepted Answer

Yachts and spaces to dock them are complementary products, as the availability of spaces to dock the yacht is essential for the use and enjoyment of the yacht. The difficulty in selling large yachts can be attributed to the lack of availability of complementary products such as dock spaces.

Question 7

Managers of Wendy's fast food restaurants keep track of prices at competitors such as McDonald's, Burger King, and Arby's, knowing that a decrease in the prices at these other fast food restaurants will
A) increase the income effect for Wendy's products.
B) increase demand for Wendy's products.
C) decrease the income effect for Wendy's products.
D) increase the complementary effect for Wendy's products.
E) decrease demand for Wendy's products.

Accepted Answer

A decrease in prices at competitors like McDonald's, Burger King, and Arby's makes those options more attractive to consumers, leading to a decrease in demand for Wendy's products as consumers may choose the cheaper alternatives.

Question 8

If the price for a product increases, the demand for the complementary product will
A) decrease.
B) increase.
C) stay the same.
D) become more elastic.
E) become more inelastic.

Accepted Answer

When the price of a product increases, people tend to buy less of that product. As a result, they will also need less of the complementary product because they are buying less of the first product. Therefore, the demand for the complementary product will decrease.

Question 9

One problem in relying on price elasticity and demand curves when setting prices is that
A) the way a product or service is marketed can have a profound impact on price elasticity.
B) the underlying ideas of the demand curve and elasticity are less relevant in the modern economy.
C) only economists can properly analyze demand curves and set prices using this tool.
D) competitors can construct the same demand curves, so there is no advantage in using them.
E) marketing split from economics over the ideas of demand and elasticity.

Accepted Answer

The way a product or service is marketed can affect consumers' perceptions of its value and therefore impact its price elasticity. For example, a luxury brand may be able to charge a higher price than a similar product from a less prestigious brand due to consumers' perceptions of the brand's exclusivity and higher quality.

Question 10

Brad always buys and uses Nike brand golf balls. If he finds a Titleist or Callaway ball in the rough, he gives it away. Brand loyal golfers like Brad allow Nike to charge a higher price and not lose many sales. By building a strong brand, Nike has effectively
A) increased the income effect for its products.
B) increased the cross-price elasticity for its products.
C) focused on the competitive parity point for its products.
D) shifted the golf ball market from a monopoly to pure competition.
E) reduced the price elasticity of demand for its products.

Accepted Answer

By building a strong brand and creating customer loyalty, Nike has reduced the price elasticity of demand for its products. This means that even if Nike raises their prices, loyal customers like Brad are still likely to purchase their golf balls instead of switching to a different brand. As a result, Nike can charge a higher price without losing many sales, increasing their profitability.

Question 11

The break-even point is estimated by
A) multiplying revenue per unit times the quantity sold.
B) dividing fixed contribution per unit by variable costs.
C) multiplying fixed costs by contribution per unit.
D) dividing fixed costs by contribution per unit.
E) dividing variable costs by fixed costs.

Accepted Answer

The break-even point is the level of sales at which total revenue equals total cost. To calculate the break-even point, we need to find the quantity at which the total contribution earned will be enough to cover the fixed costs. Contribution per unit is the difference between the selling price per unit and the variable cost per unit. By dividing fixed costs by the contribution per unit, we can determine the number of units we need to sell to reach the break-even point. Therefore, choice D is the correct answer.

Question 12

Which of the following is the most logical example of complementary products?
A) Hot dogs and hamburgers
B) VCRs and DVD players
C) Hot dogs and hot dog buns
D) Honda cars and Toyota cars
E) A university and a corporation

Accepted Answer

Hot dogs and hot dog buns are complementary products because they are typically purchased together and are intended to be used together. A hot dog without a bun is often considered incomplete, and a hot dog bun without a hot dog may not be consumed as readily. The other options listed are not complementary products as they are not typically used together or purchased as a set.

Question 13

Rodi owns Hallman's auto repair service. He has observed over the years that customers keep their high-mileage cars longer when the economy is doing poorly, creating demand for his maintenance and repair service. Rodi has observed the impact of ______________ on demand for his service.
A) breakeven points
B) the price inelasticity ratio
C) the income effect
D) target profit pricing
E) cross-price elasticity

Accepted Answer

Rodi has observed that customers' behavior is influenced by changes in the economy, specifically the impact on their income. This suggests that the income effect is affecting demand for his service. A) Breakeven points and D) Target profit pricing are not relevant to the scenario. B) Price inelasticity ratio and E) Cross-price elasticity are not mentioned and therefore cannot be determined from the given information.

Question 14

The more substitutes that exist in a market,
A) the lower the price elasticity for each product.
B) the greater the income elasticity for each product.
C) the easier it will be to utilize a target profit pricing strategy.
D) the more sensitive consumers will be to changes in the price of a particular product.
E) the more likely the market will be characterized as an oligopoly.

Accepted Answer

When more substitutes exist in the market, consumers have more options to choose from, making them more sensitive to changes in the price of a particular product. This leads to a higher price elasticity of demand, as consumers may switch to another substitute if the price of a particular product increases.

Question 15

Raymond estimates that the fixed costs associated with opening a new bank branch are $500,000. He expects the branch to attract 1,000 new customer accounts in the first year, each of which will cost $50 per year to service. He also expects to generate $100,000 per year in revenue. For Raymond, the total cost of opening the new branch and remaining open for one year will be:
A) $500,000.
B) $550,000.
C) $650,000.
D) $450,000.
E) $605,000.

Accepted Answer

The total cost includes the fixed costs ($500,000) plus the variable costs associated with servicing the new customer accounts (1,000 accounts * $50/account = $50,000), totaling $550,000.

Question 16

Frank's Heating and Air Conditioning Company specializes in electric heat pumps. Frank keeps track of the price of natural gas, knowing that
A) natural gas creates more environmental greenhouse effects than coal.
B) an increase in the price of natural gas will increase demand for his electrical heating systems.
C) gas heating systems and electrical heating systems are complementary goods.
D) when the price of natural gas goes up, the quantity demanded also rises.
E) the demand for natural gas is price elastic.

Accepted Answer

An increase in the price of natural gas will increase demand for Frank's electrical heating systems as consumers may switch to electric heat pumps as an alternative to gas heating systems.

Question 17

In general, prices should not be based on costs because
A) consumers are cost-conscious.
B) producers rarely know what their costs are.
C) consumers make their purchase decisions based on perceived value.
D) producers need to avoid creating a cost competitive parity debate.
E) customers are always right.

Accepted Answer

Prices should not be based solely on costs because customers make their purchasing decisions based on the perceived value of a product or service. The perceived value often includes factors beyond just the cost, such as quality, convenience, and brand reputation. Focusing only on costs can lead to underpriced products that may not reflect their true value in the marketplace.

Question 18

The observation that consumers are generally more sensitive to price increases than to price decreases suggests that
A) most consumers cannot remember what price they paid the last time they bought a particular product.
B) it is easier to lose customers with a price increase than to gain customers with a price decrease.
C) most consumers would rather skip buying a product than pay a higher price.
D) most consumers are emotionally attached to their favorite products and are unlikely to change, even if the price changes.
E) firms gain more customers with price decreases than they lose with price increases.

Accepted Answer

The observation that consumers are more sensitive to price increases than to price decreases suggests that it is easier to lose customers with a price increase than to gain customers with a price decrease. This is because consumers are more likely to switch to a competitor if prices increase, while they may not switch to a cheaper alternative when prices decrease. Therefore, firms need to be cautious when hiking prices, as they may lose customers in the process.

Question 19

Marketers spend millions of dollars annually trying to create or reinforce brand loyalty. Brand loyalty changes the demand curve for the firm's products by
A) reducing the price elasticity of demand.
B) making demand more oligopolistic and less monopolistic.
C) increasing the income effect.
D) reducing fixed costs and increasing the gray marketing effect.
E) shifting the market from a monopoly to pure competition.

Accepted Answer

Brand loyalty reduces the price elasticity of demand, which means that consumers are less likely to switch to a competitor's product even if the price increases, resulting in a more inelastic demand curve. This increases the firm's market power and potentially leads to higher profits.

Question 20

At the break-even point,
A) costs are zero.
B) price is maximized.
C) profits are zero.
D) fixed costs are zero.
E) contribution per unit is zero.

Accepted Answer

The break-even point is the point where a company's total revenue equals its total costs, meaning that there are no profits or losses being made. Therefore, profits are zero at the break-even point.

Quiz 14: Pricing Concepts for Establishing Value

David manages a Shoney's restaurant. He is considering staying open later in the evening. For David, the variable costs associated with staying open longer hours will include all of the following EXCEPT

Variable costs change with

Cross-price elasticity is the

Labor, materials, and energy are typically __________ costs.

Sales of national brands of orange juice tend to increase when the economy is doing well, while sales of generic orange juice increase when the economy is not doing well. This is an example of how ____________ affects demand for products.

Bill is a yacht broker in the southeastern United States. For years he has had difficulty selling large yachts locally because there were few places to dock these boats. Yachts and spaces to dock them are an example of

Managers of Wendy's fast food restaurants keep track of prices at competitors such as McDonald's, Burger King, and Arby's, knowing that a decrease in the prices at these other fast food restaurants will

If the price for a product increases, the demand for the complementary product will

One problem in relying on price elasticity and demand curves when setting prices is that

Brad always buys and uses Nike brand golf balls. If he finds a Titleist or Callaway ball in the rough, he gives it away. Brand loyal golfers like Brad allow Nike to charge a higher price and not lose many sales. By building a strong brand, Nike has effectively

The break-even point is estimated by

Which of the following is the most logical example of complementary products?

Rodi owns Hallman's auto repair service. He has observed over the years that customers keep their high-mileage cars longer when the economy is doing poorly, creating demand for his maintenance and repair service. Rodi has observed the impact of ______________ on demand for his service.

The more substitutes that exist in a market,

Frank's Heating and Air Conditioning Company specializes in electric heat pumps. Frank keeps track of the price of natural gas, knowing that

In general, prices should not be based on costs because

The observation that consumers are generally more sensitive to price increases than to price decreases suggests that

Marketers spend millions of dollars annually trying to create or reinforce brand loyalty. Brand loyalty changes the demand curve for the firm's products by

At the break-even point,